Door 1 (Court) or Door 2 (Arbitration)?

The amount of misleading and incorrect information about arbitration could fill a bookshelf. There are the misconceptions that a standard arbitration clause does not cover negligence and fraud claims, that you need a lawyer to arbitrate a dispute and that arbitrators cannot rule on mechanic's liens or establish escrow accounts.

Part of the problem lies in the arbitration statutes. They are so simple and direct that lawyers and judges have a hard time accepting them at face value. “A written agreement to submit ... to arbitration any controversy ... is valid, enforceable and irrevocable ... ” (Uniform Arb. Act §1). What could be more straightforward? The statute does not say torts, contracts, liens or even money.

Similarly, typical arbitration clauses provide that “any claim or dispute, arising out of or concerning the contract or the breach thereof” shall be decided in arbitration. The “arising out of or concerning” language helps define the “controversy” and makes the scope of arbitration very broad.

Once a demand for arbitration is made, the procedural rules governing the arbitration are simple and direct. The American Arbitration Association (AAA) has the most commonly used set of rules in the construction industry. For this article, the AAA rules will be referenced, although there are other arbitral companies that offer dispute services under different formats.

What causes problems with the use of the arbitration process is a lack of information about how it works and incorrect assumptions about your rights. This article addresses some of the more common issues in order to give you a better foundation for deciding if you want to arbitrate.

It is not all or nothing

The AAA rules give you options that are either not available in court or are simpler and less expensive than litigation. In part, these options exist because in arbitration, unlike in court, you do not need to lump all of your claims together in one filing.

°Contract interpretation only: Arbitration can be used when the “dispute” does not immediately involve money, but has to do with interpreting contract language. You can also arbitrate a dispute over the scope of an arbitration, that is, what issues the arbitrator will decide.

°Small to medium claims: “Fast track” arbitration operates under separate rules for cases where the amount in controversy is rather small. Claims under $10,000 can be submitted to the arbitration without witnesses, oral argument or discovery. Claims under $75,000 are governed by expedited procedures with limited discovery. In both instances, fast track offers an affordable and quick alternative to a lawsuit.

°Regular track: All claims can be placed into the “regular track” rules. Essentially, this is the arbitration you may be familiar with in your experience. A copy of the rules, and the current fee schedule, can be obtained from any AAA office or at www.adr.org.

It is not easy to waive arbitration

Many believe that arbitration rights are easily waived. This is a myth. For example, some think that a good way to escape arbitration is to sue in court. Then, if the other side answers the complaint and proceeds with pretrial matters, arbitration is gone.

This conclusion is wrong. Even participation in discovery and filing motions in court is simply not enough. The only sure way of avoiding arbitration, once it has been agreed to in writing, is to agree in writing not to have it.

A recent decision from the 4th U.S. Circuit Court of Appeals emphasized this point. In that case, both parties actively involved themselves in a lawsuit through discovery, motions and hearings. After almost a year had passed, the defendant, for the first time, raised the issue of arbitration. The defendant's excuse for the delay was that there had been corporate restructuring, unrelated to the case, which took attention away from realizing that there was an arbitration agreement. The court dismissed the case and sent it to arbitration, finding that the plaintiff had suffered no prejudice by the late arbitration demand.

The power of the arbitrator

The Federal Arbitration Act does not specify what powers the arbitrator has, except for the issuance of subpoenas. As a result, many believe that claims based on statutes, such as mechanic's liens, cannot be heard in arbitration. This conclusion is incorrect.

Arbitrators can decide liens, order the transfer of property rights, demand that a party post security or place funds in escrow, and award statutory damages, including punitive damages and attorney fees, for matters such as fraud, false claims and unfair business practices.

The scope of arbitral powers has yet to be fully detailed. In California, for example, claims under the state's Blue Sky Laws involving stock fraud can be heard only by a court, as must some antitrust claims.

Discovery in arbitration

State and federal rules of civil procedure allow for a variety of discovery tools, such as document production, interrogatories, depositions and inspection of property. The rules of the AAA, on the other hand, are not as encompassing.

While sometimes the parties agree to have a court's rules of civil procedure apply in arbitration, the parties do not commonly do so, leaving discovery issues for the arbitrator's determination. Typically, arbitrators require that documents be exchanged. But other types of discovery, such as depositions, must be justified and may not be allowed.

Attorney representation

This area of the law is in transition. You do not need an attorney to represent you in arbitration, although having one is highly recommended. But what if your attorney is not licensed in the state where the arbitration hearings are held?

For years, construction lawyers, such as me, would represent clients in arbitration throughout the country without seeking special admission to practice in each jurisdiction. Questions have been raised recently as to whether representing a party in arbitration is the “practice of law” for which the attorney must obtain special admission.

The question is also present where a consultant who is not a lawyer represents a party. The answers vary from state to state, and attorneys and construction industry professionals are closely watching the issue.

Conclusion

As the courts become backed up with cases, years may pass between the time of filing a lawsuit and the trial. After that, there is the potential for appeals. As an alternative, arbitration offers a range of expedited procedures in a less-structured environment. Equally important, you select the arbitrator who is your private judge.

Many companies avoid arbitration because of a misunderstanding of what it can offer and how it can be better than litigation. Do not base your choice between court and arbitration on misinformation. Learn enough about the judicial system and arbitration so you make an informed decision. EC